Banks have nothing to build on

Scott Phillips

If you're in the housing or building trade, today's earnings reports tell you what you already know – that things are tough when it comes to new homes.

Bank earnings back that story up, with Commonwealth Bank's (ASX: CBA) cash profit growing only in the mid-single digits.

If there's an economic bright spot, it's that retail sales are growing again, if JB Hi-Fi's (ASX: JBH) recent result is anything to go by, while the structural changes to the domestic and global economy – new technologies and new products and services – continue to be evident in CSL's (ASX: CSL) results.

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Builders do it tough

Building materials company Boral (ASX: BLD) and home builder Stockland (ASX: SGP) both reported results this morning, underscoring the lacklustre state of the Australian housing market. Boral had already announced plans to lay off 700 workers, and turned in a net loss of $25 million for the first half of the fiscal year.

The company that is the housing bellwether in Australia is our largest developer, Stockland. The tale was somewhat similar, with a reported loss of almost $150 million as the company wrote down the carrying value of some of its housing stock, in the middle of stagnant house prices.

Of course, there may well be an element of "big bath" accounting here, with the company's managing director, Mark Steinert, being new to the job, and likely keen to clear the decks in his first earnings announcement.

Don't bank on the banks

While much of the attention today will be on the large numbers in Commonwealth Bank's earnings release – a half-year profit of $3.78 billion and a 20 per cent increase in interim dividend – it's a small number that should be worrying shareholders. The subdued housing activity and house prices are making their presence felt in our banking sector, with CommBank only managing a 6 per cent increase in cash profit. For a company with a trailing price/earnings ratio of 15.5, that growth rate is very skinny.

With a comeback in the residential mortgage-backed securities market mentioned in today's Aus-tralian Financial Review, and bank share prices already at historic highs, this is a story that could well end badly for shareholders.

Retail poised for recovery?

Meanwhile, earnings season has provided some hope for investors – if they're invested in the right sectors. JB Hi-Fi, the former sharemarket darling that quickly became persona-non-grata has returned to investors' graces with strong results this week, boosting other discretionary retailers such as Harvey Norman (ASX: HVN), David Jones (ASX: DJS) and Myer (ASX: MYR) in the process.

It's too early to call a revival in retail, but for a sector that's been struggling in recent months, it might just be the first rays of sunlight in a long time.

Blood money

Lastly, while the Australian market mightn't be flush with world-beating technology and pharmaceutical companies, CSL stands out as one of the greatest Australian success stories of recent years. The blood-products business continues to go from strength to strength, capitalising on technological improvements and scientific breakthroughs, as well as growing healthcare spending in both the developed and developing worlds.

While its shares rarely look cheap, CSL continues to deliver, showing the opportunities for investors in companies that have leadership in their markets and which operate in markets that provide room to grow (or in which the companies can create that room by themselves).

Foolish takeaway

Like driving, investing using the rear-vision mirror is an exercise that's fraught with danger. Sometimes the trends you see – like growing spending on healthcare – are genuine, multi-cycle trends. Other times, what looks like a trend is merely an extended part in a predictable cycle.

That banks have done well for investors for years, and that retail has been tough since the GFC are indisputable facts. However, the assumption that both will continue is dangerous indeed.

Attention: While bank shares have long been a portfolio stalwart, they are far from the only option for income-seeking investors. Foolish, dividend loving investors and BusinessDay readers alike who are looking for Australian investing ideas can click here to request a Motley Fool free report entitled Secure Your Future with 3 Rock-Solid Dividend Stocks.

Scott Phillips is a Motley Fool investment analyst. He owns shares in Harvey Norman and David Jones. You can follow Scott on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

1 comment

The banks will be a victim of their own success. They have failed to reduce their margins to a reasonable level and as a result continue to make excessively high profits on the backs of hard working mums and dads struggling to pay the mortgage. The result borrowing strike as people put off buying and building homes will ultimately hurt their profits.

A rent seeking financial sector is killing the goose that laid the golden egg.